FX markets trade in a tight range this morning as Vice Premier Liu He travels to Washington amid heightened trade tensions.
With such an important global macro event taking place in Washington today, FX markets float in limbo as the possibility of the trade war resurfacing remains ever-present.
Recent price action since the Trump tweet hasn’t been reflective of the dramatic risk-off moves seen during the period of heightened trade tensions last year.
Many saw the threats from the US as a tactical move with the Trump administration flexing its negotiating prowess to try and squeeze the last remnants out of the trade deal. However, narrative was turned on its head after recent reports suggest that China set the wheels in motion.
The markets base case remains that an eleventh hour deal will be struck, but as the timeline edges towards Friday’s 12:01 cut-off period the risk of a dramatic market move increases.
The question is, if a last minute deal is reached will it just re-open dialogues and avoid further tariffs or will it include any concessions from either party?
The former is the more likely out of the two if recent negotiations are anything to go by, as concessions under the threat of further tariffs would erode any negotiating credibility.
The fact that both parties remain willing to keep dialogue open, albeit under the threat of increased tariffs, bodes well for markets thus far but market participants will undoubtedly keep a firm eye on developments in Washington today.
Chart: Recent periods of heightened trade tensions have caused greater volatility in the dollar, as measured by the DXY index, than that seen this week so far:
As history tells us, political peacocking can have dramatic and unintended consequences and given the relatively muted reaction in FX markets so far this week, there remains plenty of scope for dramatic move should there be a further deterioration in relations.
Author: Simon Harvey, FX Market Analyst at Monex Europe.